Will Renewed Sanctions Against Iran Backfire on the U.S.?

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Wharton's Philip Nichols and Brandeis University's Nader Habibi discuss the impact of renewed U.S. sanctions against Iran.

The decision to withdraw from the Iran nuclear agreement and to reinstate sanctions against the country could have significant foreign policy effects in the U.S. The decision announced Tuesday by the Trump administration could further strain the U.S. relationship with the European Union, which is party to the 2016 agreement along with the five members of the U.N. Security Council. It could also escalate the current conflict between Israel and Iran, and potentially isolate the U.S. globally.

“It’s high-risk,” said Philip Nichols, Wharton professor of legal studies and business ethics. “President Trump is rolling the dice. And risk means instability. It’s also clear that the U.S. can no longer be seen as an impartial actor in the Middle East. The world is going to be looking for the honest broker now. The U.S. now clearly would be seen as a partisan rather than as an honest broker between the parties in that region.”

Nader Habibi, a professor of the economics of the Middle East at Brandeis University, said the Trump administration’s threat of imposing “the highest level of economic sanctions” against Iran was stronger than expected. “The consequences are quite severe for Iran and for the international community as a whole in the region,” he said.

Nichols and Habibi discussed the implications of the U.S. action against Iran on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Widespread Business Impact

The impact of the sanctions on trade and investments would be severe for Iran. In January 2016, when sanctions against Iran were partially lifted under the Joint Comprehensive Plan of Action (JCPOA), it cleared the way for Iran to sell oil, trade goods and engage in the banking sector in exchange for agreeing to halt its nuclear program. The JCPOA’s signatories were Iran, the five permanent members of the U.N. Security Council (China, France, Russia, the United Kingdom and the United States) and the European Union.

A rash of business deals with Iran quickly followed, notably by Boeing, Airbus, France’s oil & gas company Total, and Royal Dutch Shell. The JCPOA also allowed Iran to resume oil exports and recover assets that were frozen during the sanctions, estimated at between $30 billion and $100 billion.

“From airplanes to oilfields, billions of dollars are on the line for international corporations,” an ABC News report on the renewed sanctions said, listing some of the major business deals that would be impacted. Boeing has a $17 billion deal with IranAir to supply 80 planes and another $3 billion deal with Iran Aseman Airlines to supply 30 planes. Airbus, too, has a $19 billion deal with IranAir for 100 aircraft. Volkswagen, which exports cars to Iran, has said in a statement that it would abide by international laws and export regulations. Nichols noted that Germany’s trade minister has told German firms to start winding up their operations in Iran. Habibi felt the sanctions would also have a “psychological impact” on the firms that are currently doing business with Iran.

Widening a Rift?

Habibi said the pullout from the nuclear agreement threatens U.S. ties with Europe. He noted that soon after Trump’s announcement of sanctions, Federica Mogherini, who heads the European Union’s foreign policy portfolio said that the EU stands committed to the nuclear agreement and that it will try to preserve the agreement as much as possible. “That represents a rift between U.S. and its allies,” Habibi said.

“Are we creating a regulatory environment in which new expertise [in the oil industry] will develop outside of the control of the U.S.?”–Philip Nichols

Nichols agreed that Europe would not go along with the U.S. in pulling out of Iran. “You have the German foreign minister, the German president and the European Union saying that [they would] stand with the accord and that that [it would be] business as usual,” he said. He also did not expect negotiations between Europe and Iran to keep the deal in place to be clandestine. “They’re going to be right out there in the open, further isolating the U.S. from what’s going on in the world, in the Middle East and in business.”

The U.S. could become further isolated if Europe “might finally be pushed into developing institutions that are resilient from the vagaries of U.S. policy,” said Nichols. “The U.S. has been a very dependable ally for a long time, but no longer. And if such institutions are created, if the U.S. can no longer pose a threat to the ongoing development of stability and stable relationships in that part of the world with Europe and with Asia, then there might be a deeper integration of Iranian people into the global system and a greater desire on the part of Iranian people not to be like other peoples, but to be a more productive and beneficial member of the global community.”

As tensions escalate in the Middle East, Habibi said the Trump administration is now clearly seen as being aligned with Israel and Saudi Arabia. “Israel clearly has an interest in containing Iran’s role in the region and it sees a move by U.S. to withdraw from the nuclear agreement as a step towards putting more pressure on Iran,” he said. Immediately after Trump’s announcement of the pullout from the nuclear deal, Israeli rockets targeted Iranian positions in Syria. “[This] means that Israel is trying to provoke a response from Iran so that it can justify additional tension with Iran,” Habibi added.

There is a “serious” risk of escalating tensions in Syria, whose regime Iran supports, said Habibi. At the same time, he expects Iran to show restraint because it is not a match for Israeli military power and because the U.S. would support Israel in any escalation in the Syrian conflict. Any de-escalation of the situation is largely in the hands of the U.S. and Israel, Habibi said.

The China Card

Few are paying attention to how China would respond to the emerging situation in the Middle East, said Nichols. He noted that China Oil is a large investor in Iran’s oil industry, and that much of the financing of those investments is occurring through Chinese banks. “China is a little bit tired of being poked by the U.S.,” he said. “This might be a forum in which they can demonstrate to their people that they’re not really going to get poked around a lot.”

“The consequences are quite severe for Iran and for the international community as a whole in the region.”–Nader Habibi

In fact, Iran is already using Chinese currency for some of its transactions with China, Habibi said. Habibi noted that China has significant economic trade with Iran, Saudi Arabia and Israel, and that it has thus far followed a policy of neutrality. “They are now in a position where everyone wants to trade with them and they seem to be very happy with their non-interventionist policy,” he said.

Habibi also noted that some European countries have already indicated that they are trying to develop mechanisms for trading with Iran without using the U.S. dollar, because the use of U.S. dollar allows the U.S. to impose sanctions and restrictions. They might try and find other currencies for their business transactions, he said. “If in the next few months, the U.S. remains isolated, and Europe, Russia and China can move forward by preserving the nuclear agreement and expanding their economic ties, the damage to Iran’s ability to engage with the global economy would be limited.”

There could be a shift in business with Iran from large multinationals like Airbus and Boeing to other companies that would not be impacted by U.S. sanctions, Habibi said. European governments could also compensate some of their corporations for any U.S. penalties they may attract for continuing to do business with Iran, he said.

“The three areas where most of Iran’s newfound cash went to were airlines, pharma and oil, and gas production,” said Nichols. He pointed out the business opportunities are huge in areas like spare parts for airlines, drilling equipment, pipes and pipe-laying. Here, the sanctions could backfire on the U.S., he suggested. “The U.S. has the premier oil extraction technology in the world. Are we creating a regulatory environment in which new expertise will develop outside of the control of the U.S.?”

Iran has every incentive to preserve the nuclear agreement because it would remove the fear of U.S. retaliation for those that do business with it, said Habibi. Before the agreement was signed, “the risks of doing business with Iran were so severe that even those who are able to take care of financial transactions were reluctant to do so,” he added.

“We’ve seen that in the past two-and-a-half years after the nuclear agreement, many European and Asian firms have been eager to reengage with Iran.” If they have been somewhat slow to rebuild their economic ties with Iran, it is “because of the implicit and sometimes explicit threats by the U.S. and the uncertainty about the future of the nuclear agreement in the past year,” he said.

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